Stable politics and a growing economy have led to increased demand for loans, but MFIs have also been rapidly increasing supply, he added.

Amret MFI – of which Chea Phalarin is president – has reduced its lowest interest rates on loans from 1.6 percent to 1.5 percent per month this year. He added that the move was necessary to attract borrowers.

“It will give customers the choice to select an institution which they think will give them good rates,” he said yesterday.

Other MFIs claim to have lowered rates from the beginning of 2011, also pointing to heavy competition among the association's 23 members. Participation in the group is mandatory for licensed MFIs in Cambodia.

Hattha Kakeskar Limited General Director Hout Ieng Tong said the firm had reduced its interest rates slightly in a bid to keep up. “The industry is getting very competitive,” he said. “We think cutting interest rates will draw new customers.”

The firm had reduced its lowest rate to 1.4 percent from 1.5 percent per month, which he said was low but supported longer-term borrowers.

Seilanithih Limited MFI Chief Executive Officer Kuch Setha said it had reduced interest rates by 0.25 percent since the beginning of the year. He claimed that lowered interest rates were not the only factor in attracting customers.

“The best things [to attract customers] are offering good service, locations close to the demand, and duration of loans,” he said.

The sector faces strong growth potential this year, according to Chea Phalarin.

MFIs could increase total lending by as much as 30 percent this year on the back of growth in agriculture, tourism, and exports, which will lead people to expand their businesses, he said. Many of the newer market entrants focus on larger cities, while older MFIs spread out in rural areas.

Microfinance loans rose 33 percent last year to US$647 million in 2010, from $485 million the year previous, according to CMA data. It also claimed the Non-Performing Loan rate declined to 1.29 percent, from 2.86 percent in 2009.